The Rise of Digital Currencies in the Aftermath of COVID-19
Traditional modes of economic production entirely shut down due to the covid-19 pandemic and subsequent lockdown. With the usual places to invest out of the question, people had to find new places to put their money. Amidst all of this, cryptocurrencies made a killing.
It’s basic finance. When the returns on some investment x begin to fall vis-a-vis investment y, there is a shift towards the latter until the returns on both have equalised. This is especially true when x and y represent investments of the same class i.e. similar risks and returns.
This is hypothesised to have led to the massive appreciation of Bitcoin in 2020. Last year, Bitcoin touched it’s all-time-high at a valuation of more than $50,000. Similar trends were seen in smaller, ‘alt coins’ as well.
One coin, VET, relying on blockchain technology to serve luxury brands saw its valuation rise tremendously. Cardano, another alt-coin developed by the makers behind Ethereum also saw similar gains. Ethereum itself, poised to bring about wholescale changes in July 2021, saw an appreciation in its value.
The largest changes by far were seen in Dogecoin. Dogecoin, a largely ‘meme-coin’ offering little in the way of actual services to producers, saw a rise of upwards of hundreds of percents. This trend was in part due to the intervention in the market of big-tech guru, Elon Musk, who holds tremendous say in the cryptocurrency market.
In this manner, funds began to move from traditional risky assets like stocks to cryptocurrencies. However a trend reversal has started to happen now.
Since countries across the world are starting to recover from the covid-19 pandemic, lockdowns are being lifted worldwide. Traditional sectors of finance are then seeing a recovery and are poised to continue to see them in the future. For this reason, investors are yet again shifting their money from digital currencies to stocks.
The crypto market has hence seen a downturn over the period of the last two months. Bitcoin’s value has gradually fallen to sub $20,000 and other coins have followed suit. As the global economy recovers in the future it will be interesting to see just what position crypto manages to maintain in the market in the years to come.